Question

(Net present value calculation) Big Steve's, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $110,000 and will generate net cash inflows of $16,000 per year for 9 years.

a. What is the project's NPV using a discount rate of 9 percent? Should the project be accepted? Why or why not?
b. What is the project's NPV using a discount rate of 17 percent? Should the project be accepted? Why or why not?
c. What is this project's internal rate of return? Should the project be accepted? Why or why not?

Answer 1

To calculate the NPV of the project, discount the future cash flows. If NPV is positive, accept the project; if negative, reject. Also, calculate the internal rate of return (IRR) of the project.

Step-by-step explanation:

To calculate the Net Present Value (NPV) of the project, we need to discount the future cash flows to their present value. For part a, using a discount rate of 9 percent, we calculate the present value of the cash inflows of $16,000 per year for 9 years. Adding up all the present values, we subtract the initial outlay of $110,000 to find the NPV. If the NPV is positive, the project should be accepted; if negative, it should be rejected. For part b, we repeat the same calculation using a discount rate of 17 percent. For part c, we need to find the internal rate of return (IRR) of the project.